When Attorney-Client Communications Aren't Attorney-Client Privileged

PROPERTY – BOAT VANDALISM CLAIM – DISCOVERY – REPORTS FROM COUNSEL – EXAMINATIONS UNDER OATH
Melworm v. Encompass Indem. Co.
(Sup. Ct., Nassau Co., decided 7/16/2012)

I could say I told you so.

Plaintiffs made a claim to defendant Encompass for vandalism damage to their dry-docked 1977 40-foot Tollycraft yacht.  Encompass retained counsel to conduct an EUO of its insured(s) and ultimately denied payment to them.  Plaintiffs sued and served interrogatories, seeking, among other things, the contents of Encompass' claim file.  In response, Encompass produced a redacted copy of its electronic claims diary, asserting that the redacted content was protected by attorney-client privilege. Plaintiffs moved to compel Encompass to produce the redacted portions of the electronic claims diary and letters from retained counsel to Encompass.

In ordering Encompass to produce an unredacted claims diary and letters from counsel for the court's in camera inspection, Nassau County Supreme Court Justice Arthur M. Diamond rejected the plaintiffs' argument that the attorney-client privilege at issue belonged to the plaintiffs and not to their insurer, but held that "communications which occurred before the date that the defendants had reasonable grounds to reject the claim ... are not immune from discovery":

In order to raise a valid claim of attorney-client privilege, the party seeking to withhold the information must show that it was a "confidential communication" made between the attorney and the client in the context of legal advice or services. Documents which are "not primarily of a legal character, but [express] substantial nonlegal concerns" are not privileged. However, "[s]o long as the communication is primarily or predominantly of a legal character, the privilege is not lost merely by reason of the fact that it also refers to certain nonlegal matters" (Bertalo's Rest. v. Exchange Ins. Co., 240 AD2d 452 [2nd Dept. 1997]; Rossi v Blue Cross & Blue Shield, 73 NY2d 588, 594 [1989 ]).

Defendants' claim that the internal discovery conducted by retained counsel, such as the examination under oath of the insured, is protected by the attorney client privilege is clearly misplaced. First, in a dispute between the insurer and the insured pertaining to an underlying claim, the claims file is generally not privileged material and the insurer cannot claim confidentiality against the insured. [Diamond State Ins. Co. v. Utica First Ins. Co., 37 AD3d 160; Woodson v. American Transit Insurance Company, 280 AD2d 328 [1st Dept. 2001]; Fireman's Insurance Company of Newark v. Norman Gray et al. and Allstate Insurance Company, 41 AD2d 863]. Second, as stated by the Second Department in Bombard v. Amica Mut. Ins. Co., (11 AD3d 647, 648 [2nd Dept. 2004]):

"[T]he payment or rejection of claims is a part of the regular business of an insurance company. Consequently, reports which aid it in the process of deciding which of the two indicated actions to pursue are made in the regular course of its business" (Landmark Ins. Co. v Beau Rivage Rest., 121 AD2d 98, 101 [1986] [internal quotation marks omitted]). Reports prepared by insurance investigators, adjusters, or attorneys [emphasis added] before the decision is made to pay or reject a claim are thus not privileged and are discoverable (see Landmark Ins. Co. v Beau Rivage Rest., supra at 101; see also Bertalo's Rest. v Exchange Ins. Co., 240 AD2d 452, 454 [1997]; Roman Catholic Church of Good Shepherd v Tempco Sys., 202 AD2d 257, 258 [1994]; Paramount Ins. Co. v Eli Constr. Gen. Contr., 159 AD2d 447 [1990]), even when those reports are "mixed/multi-purpose" reports, motivated in part by the potential for litigation with the insured (see Landmark Ins. Co. v Beau Rivage Rest., supra at 102; see also McKie v Taylor, 146 AD2d 921 [1989]).'[Id.].

 Merely because such an investigation was undertaken by attorneys will not cloak the reports and communications with privilege (see, Spectrum Sys. Intl. Corp. v Chemical Bank, 78 NY2d 371, 377) because the reports, although prepared by attorneys, are prepared as part of the "regular business" of the insurance company. (Bertalo's Rest.v. Exchange Ins. Co., 240 AD2d 452 [2nd Dept. 1997]). Moreover, evaluating the extent of potential liability of the insured, which would necessarily include assessment of damages, is within the ordinary course of business of an insurance company, and therefore is not privileged even though it has been conducted by retained counsel to perform examinations under oath. (Westhampton Adult Home v. National Union Fire Ins. Co. of Pittsburgh Pa., 105 AD2d 627, 628, 481 N.Y.S.2d 358 [1st Dept 1984]).

Justice Diamond concluded that after making his in camera review, "[i]f [the withheld materials] are primarily reports of an investigation of plaintiffs' claim, then they are then discoverable even though prepared by counsel." (Emphasis added.)

This language and verbiage from the Second Department's 1997 decision in Bertalo's Rest. v Exchange Ins. Co. seem to leave open the possibility that not all pre-denial attorney communications to their insurer clients will be discoverable:

In order to raise a valid claim of privilege, the party seeking to withhold the information must show that it was a "confidential communication" made between the attorney and the client in the context of legal advice or services (see, Matter of Priest v Hennessy, 51 N.Y.2d 62, 69; Coastal Oil N. Y. v Peck, 184 AD2d 241). Documents which are "not primarily of a legal character, but [express] substantial nonlegal concerns" are not privileged (Cooper-Rutter Assocs. v Anchor Natl. Life Ins. Co., 168 AD2d 663). However, "[s]o long as the communication is primarily or predominantly of a legal character, the privilege is not lost merely by reason of the fact that it also refers to certain nonlegal matters" (Rossi v Blue Cross & Blue Shield, 73 N.Y.2d 588, 594).

In Bertalo's Restaurant, the property insurer, Exchange Insurance Company, sought to protect "reports" made by the attorneys who had conducted the investigation of the claim for Exchange and communications from Exchange to those attorneys. In spite of its citation to the Rossi v. Blue Cross & Blue Shield proposition, however -- that so long as the communication is primarily or predominantly of a legal character, the privilege is not lost merely by reason of the fact that it also refers to certain nonlegal matters -- it is important to note that the Second Department in Bertalo's Restaurant ordered the disclosure of all documents prepared before the date Exchange contended it had decided to deny its insured's claim.

Both first- and third-party insurers should be guided accordingly, especially within the jurisdictions of the First and Second Departments in New York.